What is the Biggest Benefit of a USDA Loan?

Probably the single biggest draw of USDA Loans is that it requires no down payment. USDA and VA loans are the only no down payment programs in the entire country. VA eligibility comes from serving time in the military and/or the reserves. The USDA Rural Development Loan Program doesn’t require any such requirements. It only requires that the home falls in a designated eligible area, and the household income doesn’t exceed the set income limit designated for that county [You can quickly scroll to your state/county from our USDA Eligibility page and check designated income limits]. Because of these criteria, one may thing the loan is intended for only low income families, who live way out in the country. Although in many instances that is the case, the program actually is quite flexible. Many times, the loan is eligible in suburban areas and/or areas that aren’t even all that rural. Also, depending on the county or family size, the household income limit can be well over 6 figures.

With all the benefits and the flexibility of the program, you would think realtors and homebuyers alike would be all over the program. However, that is not typically the case. Many realtors are not well versed in the program or aren’t even aware that it exists at all. Also, because the loan does go through tougher appraisal standards, that turns people who want a cheap “fixer upper” away. The appraiser must be state licensed and on the USDA approved list. The loan must also go through USDA underwriting which can also slow down the process a bit. Regardless, the USDA loan is an excellent program that helps homebuyers with the biggest hurdle of getting a home – a down payment. J

Low Down Payments

If you’re looking for an affordable mortgage that’s actually obtainable don’t overlook a USDA Rural Development Loan. They’re one of the few ways you can still get a zero down payment home loan, outside of the VA program for our military veterans. To go along with no down payment, USDA Loans also carry interest rates comparable to conventional mortgages. There’s no private mortgage insurance required, although you do have to pay an annual fee equal to 0.3% of the loan balance. This is quite a bit less than you’d have to pay for PMI on a conventional loan with less than 20% down. By comparison, FHA requires a 3.5% down payment and its annual fee is 1.10-1.15% on 30 year loans. As the name implies USDA Rural Development Mortgages are limited to home purchases in rural areas. However, the definition of rural is fairly broad- it includes small towns and the outlying areas of many small-to-midsized cities, so you don’t have to live in the sticks to qualify. USDA loans are also limited to people with low and moderate incomes, but those limits vary depending on where you live. The general rule is the household income cannot exceed 115% of the median income for your area, other things can factor in and raise that limit such as kids under 18. There isn’t a specific limit on the amount you can barrow. However, typically speaking you can get approved for three times your annual income before taxes. Does all of this sound good to you? Let’s get you on the phone with one of our USDA specialist and pre-approved today! J

USDA and Construction Loans

USDA considers a property new construction if the dwelling has been built within 12 months and has never been occupied.

There are 2 major requirements that must be met for USDA Loans on a new construction:

The first major requirement is that the lender is required to obtain evidence that a new construction property was built in compliance with certified plans and specifications (e.g., International Residential Code, CABO, BOCA, etc.).

This can be done in the following ways:

1) By providing a copy of an eligible building permit that has been issued by an approved jurisdiction. The State Director is responsible for making the determination of an “eligible jurisdiction” per RD Instruction 1924-A.

OR

 

2) By providing a Certificate of Occupancy or completion certificate issued by an approved local jurisdiction as determined by the State Director and published as a state supplement; or

Certification from a qualified individual or organization (e.g., licensed architect, engineer, national code certified plan reviewer, local building official, etc.) that has reviewed the plans and specifications, and determined they meet all applicable building codes and development standards. If the reviewer does not have their own certification form, Form RD 1924-25 “Plan Certification,” may be used. (this can be obtained online at http://www.rurdev.usda.gov/RD_Forms_Series1902-1944.html)

 

The second major requirement is that the lender must also retain evidence that construction inspections were performed throughout the project in accordance with section 1980.341(b)(2).
This can be done in the following ways:

 

  1. Certificate of Occupancy issued by an eligible local jurisdiction as determined by the State Director and published, after a minimum of 3 construction inspections were performed AND a 1-year builder warranty plan issued acceptable to RD;

OR

 

2. Copies of 3 construction inspections performed when:
(1) footings and foundation are ready to be poured (2) shell is complete, but plumbing, electrical and mechanical work is still exposed and (3) final inspection of completed work prior to occupancy AND a 1-year builder warranty plan issued acceptable to RD (builders may utilize their own form, HUD-92544, or Form RD 1924-19); (these forms can be obtained online at http://www.rurdev.usda.gov/RD_Forms_Series1902-1944.html)

OR

3. Final inspection and a 10-year insured builder warranty plan acceptable to Rural Development.

(Applicants that wish to build their own homes cannot self-warranty their own work.)

 

FYI -New construction documents are not normally needed prior to Rural Development (unless there is a special circumstance) .  Most of the time the builders will not execute  the warranty until closing, so you will just need have the actual warranty for the  underwriter review and request that it be executed at closing.

 

An appraisal inspection IS required prior to Rural Development.  You can choose to wait until the property is complete OR you can have the initial inspection done prior to the completion of the property and then pay to have a completion report done at the end. This will cost a few extra dollars (typically between $125-$200), but could save you time!